Abstract

Vietnam's Geographical Advantages

Vietnam shares a border with China; northern Vietnam is linked by both road and rail with Guangdong Province, the heart of China's manufacturing industry. Manufacturers can thus use Vietnam as a supplementary production location, or as a source of supply for components and materials, taking advantage of Vietnam's low production costs. Vietnam is also a member of both the WTO and ASEAN, so locating one's factory in Vietnam gives ready access to the markets of all WTO and ASEAN member economies. In particular, manufacturers can benefit from the preferential tariff rates that apply to trade within the ASEAN region. Vietnam's geographical advantages thus offer a solution for companies that are currently experiencing difficulties because of rising production costs in China.

Good Investment Environment

Political stability is a prerequisite for making a success of overseas investment. When compared to the riots, political upheavals and oppressive military rule that are to be found in other ASEAN member nations at the moment, Vietnam's political stability makes it a very attractive target for investment. With the economy continuing to grow at a rate that exceeds 8% per year, in the future the Vietnamese domestic market will also constitute a significant market of nearly 100 million consumers in its own right. In the future, therefore, Vietnam will constitute both a major new Asian production location and an important market.

Industry Cluster Shifting

In the past, industrial development in Vietnam was largely centered around Ho Chi Minh City, which became a magnet both for people and investment. As the cost of land and labor started to rise, southern Vietnam's advantages as a production location began to be eroded. The intensity of land use in northern Vietnam is lower than it is in the south, and wages are also lower; provincial governments in the north have been offering incentives for foreign investment that are superior to those available in the south. Although the infrastructure in northern Vietnam is still inferior to that in the south, given that Vietnam's capital city -Hanoi -is located in the north, the government is expected to spend heavily to improve the north's infrastructure, so as to achieve more balanced regional development. Northern Vietnam's geographical proximity to China and the other countries of peninsula Southeast Asia helps to compensate for the absence of a comprehensive ICT industry supply chain in the region. In the future, the center of gravity of Vietnam's ICT industry clusters can be expected to gradually move north.

Future Investment Challenges

Impressed by Vietnam's development potential, companies from all over the world have been investing there. In terms of cumulative investment over the years, Taiwan is Vietnam's largest source of foreign investment. Despite the signing of an investment protection agreement between Taiwan and Vietnam, ICT manufacturers still need to evaluate the investment risk carefully before investing in Vietnam. Problems to take into account include Vietnam's inadequate infrastructure, the absence of a comprehensive financial system, gaps in the supply chain, unreliable electricity supply, lack of middle and senior managers, and cultural differences.

Given that both countries are under the rule of the Communist Party, China offers some idea of how Vietnam can be expected to develop in the future. It is likely that the problems that affect foreign investment in China -including widespread graft and corruption, an unpredictable and rapidly changing legal and regulatory framework, and administrative inefficiency -will become more common in Vietnam.

Business Opportunities from Infrastructure Projects

In the past, Vietnam has suffered from unsatisfactory infrastructure, including transportation and public utilities. The Vietnamese government is now leveraging foreign investment to achieve improvements in these areas. Significant results have already been achieved in a number of areas, including highway and railway construction, industrial zone development, water and electricity supply, and IT and communications infrastructure. Given the Vietnamese government's commitment to achieving its national development goals and the widely recognized ability of socialist/communist regimes to get things done, it can be anticipated that Vietnam's infrastructure will improve steadily in the future. As government spending on infrastructure increases, foreign companies will have more opportunities to bid for public construction tenders.

Appendix

List of Companies